CANADA FX DEBT-C$ weakens to 2-week low as oil falls

Mon Aug 29, 2016 4:55pm EDT
 
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(Adds analyst quotes and details on Canada's yield curve,
updates prices)
    * Canadian dollar ends at C$1.3022, or 76.79 U.S. cents
    * Loonie touches its weakest since Aug. 11 at C$1.3048
    * Bond prices higher across flatter maturity curve

    By Fergal Smith
    TORONTO, Aug 29 (Reuters) - The Canadian dollar weakened to
a two-week low against its U.S. counterpart on Monday as oil
fell, although it pared some losses as investors reduced bets
for a U.S. interest rate hike as soon as September.
    The probability of a Federal Reserve rate increase in
September fell to 21 percent, according to CME Group's FedWatch
tool. It rose to 33 percent on Friday following comments from
Fed officials, including Fed Chair Janet Yellen.
    Reduced chances of Fed rate hikes came as data showed the
central bank's preferred inflation measure continued to run well
below its 2 percent target in July and as investors
turned attention to the release of U.S. jobs data at the end of
the week.
    "A lot depends on the (U.S.) jobs figures ... if the Fed
sees more tightening in the labour market I think that raises
the case that we could actually see the Fed move in September,"
said Scott Smith, senior market analyst at Cambridge Global
Payments.    
    U.S. crude oil futures settled 66 cents lower at
$46.98 a barrel, pressured by high output from Middle East OPEC
members and recent strengthening in the U.S. dollar.
    A subdued price for oil, which is one of Canada's major
exports, will contribute to divergence in economic growth
between the United States and Canada in the second half of 2016
and in 2017, said Smith, who expects the loonie to weaken to
between C$1.3300 and C$1.3500 by year end.
    The Canadian dollar ended at C$1.3022 to the
greenback, or 76.79 U.S. cents, weaker than Friday's close of
C$1.3000, or 76.92 U.S. cents.
    The currency's strongest level of the session was C$1.2975,
while it touched its weakest since Aug. 11 at C$1.3048.
    Speculators raised bullish bets on the Canadian dollar for
the first week in four, Commodity Futures Trading Commission
data showed on Friday. 
    Canadian government bond prices were higher in sympathy with
U.S. Treasuries. The two-year bond rose 3.5 Canadian
cents to yield 0.589 percent and the benchmark 10-year
 climbed 60 Canadian cents to yield 1.029 percent.
    The curve flattened, as the spread between the 2-year and
10-year yields narrowed by 4.5 basis points to 44 basis points,
its narrowest since January 2008, indicating outperformance for
longer-dated bonds.
    Canada's gross domestic product data for the second quarter
and June are due on Wednesday. 

 (Reporting by Fergal Smith Editing by W Simon and Meredith
Mazzilli)